I currently have 2 mortgages one will be paid off in the next 2 months. Debating between investing in another rental vs. paying off 2nd mortgage. I have no other debt save the 2 mortgages.

Mon Mar 23, 2015 5:34 pm

littleroc02usModerator

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I have one Duplex rental property in a nice Minneapolis neighborhood that are both rented. My property is worth 225k and I owe 132k. I cash flow $450 after all expenses, Mortgage, insurance and taxes. Plus I have an EF fund. Because I have nearly 100k equity in this property and I'm cashing flowing on this property I personally would feel comfortable in saving for another rental property with 25% down. I like the idea of lower risks versus someone who keeps very little equity in their property.

My brother in law has 3 investment properties, has very little equity and very little cash flow. How is that a good idea.

Risk comes from not knowing what you're doing. (Warren Buffet)

Tue Mar 24, 2015 9:17 pm

oldguySenior Member

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quote: How is that a good idea.

I'll try to answer that. I did that very thing for over 30 years. I had 4 houses, whenever my equity got up to around 50% in one of the houses, I refi'd and removed the equity. One house was on it's 5th mortgage. Ie, I kept my equity purposely low (and my cashflow purposely low). So - not unlike your BIL.

And I used the cashouts during all of those 30 years as seed money to invest in the stock market. The houses did well over those years - but the seed money in stocks did way better, that was the big part of my wealth.

Whenever I want to increase my risk level, I do it by refi'ing a house and removing the equity.

Tue Mar 24, 2015 10:58 pm

WinoSenior Member

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Once again, the oldguy method requires the buyer/borrower to ALREADY have the value in cash or equivalent. You then have the ability to pay off the borrowed amount by withdrawing assets from your investments. If you're borrowing money you do not have, you cannot invest the same value in the market.

Unless said investments crash at the same time as the market crashes - 2009, anyone? In that case, you're stuck cash-flowing the mortgage with your own income. If at the same time as the aforementioned crash your renters - say, they lost their job and were forced to downsize - move out, you must be able to cover all costs from your investments and personal income.

This is why having equity/value set aside in various entities is the safer way. If you have 20% of your wealth in real estate equity, 60% in equities (stocks), and 20% in bonds, rocks (gold, silver, etc), or other alternatives, you're more insulated to market changes. If one or two of the above go down, it is likely the third will go up, giving you the likelihood of a win in at least one category.

Risk is real, and putting everything in the market as oldguy proposes is a very real and very significant risk Note he had many episodes of investing, which gives him a dollar-cost average in operation if not in intent, which insulated him from some of the risk. To put every penny of savings and equity into the stock market at one time opens one to the chance that the market will crash, cutting you to as low as 50% overnight, with a probable 4 to 5 year wait until returning to the same level of value.

Wed Mar 25, 2015 6:40 am

oldguySenior Member

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quote: the oldguy method requires the buyer/borrower to ALREADY have the value in cash or equivalent. You then have the ability to pay off the borrowed amount by withdrawing assets from your investments. If you're borrowing money you do not have, you cannot invest the same value in the market.

Not true. I bought 5 houses between 1971 and 1981. I doubt that I had over $10,000 at the time. Bought #1, 3 yrs later I put a 2nd on it and used the money to make a DP on #2. A couple yrs later I put a 2nd on #2 and made a DP on #3. In 80 or 81 I sold #1 and used the money to make DPs on #4 & #5. Then I kept those 4 houses for about 30 yrs (still have 2 of them). But I definitely did not have "cash or equivalent" - that came later.

But you are right about 'risk' - risk management, risk analysis, risk mitigation is extremely important, you need to analyze the possible outcomes and plan your back-door exits for various scenarios. But you NEED risk, no wage earner ever became wealthy with savings accounts, it requires investments.

Wed Mar 25, 2015 3:35 pm

littleroc02usModerator

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quote:Originally posted by oldguy

quote: How is that a good idea.

I'll try to answer that. I did that very thing for over 30 years. I had 4 houses, whenever my equity got up to around 50% in one of the houses, I refi'd and removed the equity. One house was on it's 5th mortgage. Ie, I kept my equity purposely low (and my cashflow purposely low). So - not unlike your BIL.

And I used the cashouts during all of those 30 years as seed money to invest in the stock market. The houses did well over those years - but the seed money in stocks did way better, that was the big part of my wealth.

Whenever I want to increase my risk level, I do it by refi'ing a house and removing the equity.

Yes, but he has no equity to be drawn for investing and may not for 10 years like we just experience here in Minnesota from 2005 until 2016, so that doesn't seem like a good idea to me. For example we bought a house in 2006 for 224k and in 2015 we sold it for 220k. So the only equity we had was the extra income we put towards the mortgage which was 50k. So if we did it Old Guy's way and not put any extra money towards the mortgage and waited 10 years for there to be equity in the house there wouldn't be any, unless maybe we waited another 10 years.

Plus if my brother in laws tenants move out he'll be paying an extra mortgage each month. Negative cash flow doesn't improve anyone's wealth no matter how you spin the mathematics.

Risk comes from not knowing what you're doing. (Warren Buffet)

Wed Mar 25, 2015 4:28 pm

oldguySenior Member

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quote: For example we bought a house in 2006 for 224k and in 2015 we sold it for 220k.

Why did you sell it?

quote: So the only equity we had was the extra income we put towards the mortgage which was 50k.

And why would you store $50,000 of your working capital in house equity? As you said, you got zero return for 9 yrs. IMO, it would be better to invest that $5555/yr into an Index Fund for the 9 yrs.

One of my rules is to avoid 'buying' equity, instead, wait for the market to 'give' you equity.

OK, again, I'll try to answer that.
Say that I refi a rental and withdraw most of the equity, say $30,000 - so now I have negative cashflow. I put that $30k in an 11% Index Fund, that's $685,000 in 30 yrs. Meanwhile, in 3 or 4 yrs I raise the rent a couple times and cashflow comes back. But my goal was never to add current income, that, on top of my salary, would be taxed heavily. My goal was to grow those $685k lumps tax-deferred. BTW, each time I sold a house, that didn't interrupt the $30k lump in the Index Fund - I kept all of them.

So, some people want income property, some people want growth property. I wanted growth, wealth-building.

Wed Mar 25, 2015 5:28 pm

littleroc02usModerator

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quote:Originally posted by oldguy

quote: For example we bought a house in 2006 for 224k and in 2015 we sold it for 220k.

quote: Why did you sell it?

Because it was our primary and we moved to change school districts for our child and for a different house.

quote: So the only equity we had was the extra income we put towards the mortgage which was 50k.

quote: And why would you store $50,000 of your working capital in house equity? As you said, you got zero return for 9 yrs. IMO, it would be better to invest that $5555/yr into an Index Fund for the 9 yrs.

Easy answer, because 4.5% return on your money which is what our interest rate is a guarenteed ROI, whereas an index fund could have a negative ROI, like it did in 2008 and 2009, plus it freed up monthly disposable income that you have when you have lower payments. When you have higher payments, because you borrow so much you have less cash to invest with. We already max out our Roth IRA's and 401k's.

OK, again, I'll try to answer that.
Say that I refi a rental and withdraw most of the equity, say $30,000 - so now I have negative cashflow. I put that $30k in an 11% Index Fund, that's $685,000 in 30 yrs. Meanwhile, in 3 or 4 yrs I raise the rent a couple times and cashflow comes back. But my goal was never to add current income, that, on top of my salary, would be taxed heavily. My goal was to grow those $685k lumps tax-deferred. BTW, each time I sold a house, that didn't interrupt the $30k lump in the Index Fund - I kept all of them.

So, some people want income property, some people want growth property. I wanted growth, wealth-building.

Your missing the point the point. If you have no equity in your real estate like we did for 9 years, then how does one borrow against their equity, when they have no equity?
Remind you as I stated with my BIL's situation, because he has no equity in his properties, he has no equity to borrow from. Lastly, we want cash flow now and to hold a ton of equity in our real estate which we don't plan on selling. I use the cash flow to save for the next rental property and put 25% down. My plan is to accumulate 5 to 10 properties and eventually have the tenants pay the mortgages off, so that I only have maintenance, taxes, insurance to pay for and meanwhile I'm collecting checks on a paid for property when retired. Our Roths' and 401k's will be supplemental.

Risk comes from not knowing what you're doing. (Warren Buffet)

Wed Mar 25, 2015 6:39 pm

JasonronFirst Time Poster

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rental 2 mortgages

Pay off the second mortgage and then save the rental income for another 20% down then put up the other two as collateral along with the 20% and buy multi units. That should make 1 payment but the cost spread out between units and your net worth and cash flow going up